I get this questions all the time, “What Are Closing Costs?” When you buy a house you have the purchase price cost and you have closing costs. The costs combined make up the total amount you will spend for the house. You may also have additional costs such as hiring various inspectors to inspect the well, house, septic and the heating, ventilating, air conditioning (HVAC) systems. So, as you can see, buying a home entails more out-of-pocket expenses than just the down payment. Further more, there are also costs to pay for items such as the title insurance policy, recording fees, courier charges, reserves to set up an impound account and fees that a lender charges. Lender fees are usually the bulk of closing costs and can be quite expensive. However, there’s a way to have the Seller pay you closing costs, read on.
Just when you thought you had enough money saved up to buy a house you, learn about closing costs.
Here’s what you should expect to pay in closing costs:
Generally speaking, real estate closing costs are about 2 to 4 percent of the purchase price. The lender’s points and origination fees can have a significant impact on your closing costs. Your lender must disclose these fees to you in what’s known as a good faith estimate. As an example, the closing costs to purchase a $300,000 home could be approximately $3,000 to $12,000. This is a huge range; now you can see why you must talk about closing costs with your lender up front and not on the day you hope to close escrow.
But wait, there’s more, Closing costs come in two flavors.
Non-Recurring Closing Costs
Any fee that that is paid one time and never again is referred to as a “non-recurring” closing cost. Here’s an example of non-recurring closing costs:
- Title Insurance Policies
- Escrow Fee
- Notary Charges
- Wire Fees (for the transfer of money)
- Courier Charges (FedEx or other over night carriers)
- Attorney Fees
- Recording (a charge to record a document with the County Recorder)
- State, County or City Transfer Taxes
- Home Warranty Insurance Policy
- Natural Hazard Disclosures (a formal disclosure of natural hazards for the area in which your new house is located)
- Inspection Fees paid to home or system inspectors
- Lender fees paid in conjunction with the loan on the HUD-1
Recurring Closings Costs (also known as “prepaids”)
Recurring fees are those charges that must be paid again and again. An example of prepaids:
- Insurance Premiums
- Property Taxes
- Mortgage Insurance
- Prepaid Interest
Depending on what month you actually purchase your new home will determine the amount of the prepaid costs. Many of the prepaid expenses are calculated on a prorata basis. If your loan has an impound account for property taxes and insurance, the costs of insurance and taxes will divided by the months remaining before they are due again.
It looks like Closing Cost Could Be a Real Deal Breaker
Maybe not…A technique that is often used by shrewd home buyers is including the closing costs in the Purchase Agreement as a Seller’s expense. That’s correct, you are asking the Seller to pay your closing costs! However, always check with your lender before you negotiate an offer that involves a seller credit because the terms of the loan you are seeking may not allow a Seller credit for closing costs. And, be sure your real estate agent knows the type of loan you intend to use also. It’s always a good idea to have your real estate agent and your lender discuss your options before you go looking for a house to buy. Here are some important points to be aware of:
- 100% financing may limit the amount of Seller credits, if any
- If you have a high credit score and a down payment, the terms of your loan may allow a seller credit up to 6% of the total purchase price
- As a borrower, the lender will not let you receive cash back from a seller at closing, those days are long gone